Formation of Rationally Heterogeneous Expectations

Pfajfar, Damjan

doi:10.2139/ssrn.2165199

“…There is also empirical work on forecasts, based on survey data, and indirect measures of expectations from asset markets that help to assess the alternative models of learning and expectations formation. For recent papers, see Branch (2004), Branch and Evans (2006b), Orphanides and Williams (2005a), Basdevant (2005), Pfajfar (2007), and Pfajfar and Santoro (2007). For research on expectations formation and learning in experiment settings, see Marimon and Sunder (1993), Marimon and Sunder (1995), Evans, Honkapohja, and Marimon (2001), Adam (2007), and the new survey Hommes (2011).…”

Section: Estimated Models With Learningmentioning

confidence: 99%

Learning as a Rational Foundation for Macroeconomics and Finance

Evans¹,

Honkapohja²

2013

Rethinking Expectations

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This chapter examines the central ideas about learning and bounded rationality for macroeconomics and finance. It first introduces the main methodological issues concerning expectation formation and learning before discussing the circumstances in which rational expectations may arise. It then reviews empirical work that applies learning to macroeconomic issues and asset prices, along with the implications of the use of structural knowledge in learning and the form of the agents' decision rules. As an application, the scope of Ricardian Equivalence is considered. The chapter also presents three applications of the learning approach to monetary policy: the appropriate specification of interest rate rules; implementation of price-level targeting to achieve learning stability of the optimal rational expectations equilibrium; and whether under learning, commitment to price-level targeting can be sufficient to rule out the deflation trap of a zero interest rate lower bound and return the economy to the intended rational expectations steady state.

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“…There is also empirical work on forecasts, based on survey data, and indirect measures of expectations from asset markets that help to assess the alternative models of learning and expectations formation. For recent papers, see Branch (2004), Branch and Evans (2006b), Orphanides and Williams (2005a), Basdevant (2005), Pfajfar (2007), and Pfajfar and Santoro (2007). For research on expectations formation and learning in experiment settings, see Marimon and Sunder (1993), Marimon and Sunder (1995), Evans, Honkapohja, and Marimon (2001), Adam (2007), and the new survey Hommes (2011).…”

Section: Estimated Models With Learningmentioning

confidence: 99%

Learning as a Rational Foundation for Macroeconomics and Finance

Evans

¹

,

Honkapohja

²

2011

View full text Add to dashboard Cite

Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning, such as discounting of older data, use of misspecified models, or heterogeneous choice by agents between competing models, generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning-stability of the optimal RE equilibrium and whether under learning price-level targeting can rule out the deflation trap at the zero-lower-bound. * Any views expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland. Financial support from National Science Foundation Grant no. SES-1025011 is gratefully acknowledged.

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2. Learning as a Rational Foundation for Macroeconomics and Finance

Evans

¹

,

Honkapohja

²

2013

Rethinking Expectations

22

0

View full text Add to dashboard Cite

Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning, such as discounting of older data, use of misspecified models, or heterogeneous choice by agents between competing models, generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning-stability of the optimal RE equilibrium and whether under learning price-level targeting can rule out the deflation trap at the zero-lower-bound.

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Formation of Rationally Heterogeneous Expectations

Cited by 5 publications

References 41 publications

Learning as a Rational Foundation for Macroeconomics and Finance

Learning as a Rational Foundation for Macroeconomics and Finance

Learning as a Rational Foundation for Macroeconomics and Finance

2. Learning as a Rational Foundation for Macroeconomics and Finance

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